Apple smashes expectations, stock hits a new high

For the March period, Apple beat expectations for earnings per share, revenue, thanks to big iPhone sales.

Full numbers are below.

In reaction to results, shares were up 1.25%, tipping Apple's shares to a new all-time high above $134.

Apple announced an update to its cash return program. It will be returning $200 billion to shareholders through buybacks and dividends over the next two years. The bulk of the return will come through buybacks.

While the results were mostly great, iPad sales were worse than expected, falling 23% year-over-year.

Why is the iPad down? On the earnings call, CEO Tim Cook said there was a little cannibalization as the iPhone and the Mac grow, cutting into iPad sales. A bigger iPhone plus a Mac is replacing the iPad.

Cook says he still thinks the iPad is a good business. In the US, he said 40% of buyers are new to the iPad, and in China, 70% of buyers are new to the product. As a result, he doesn't think the market is saturated. He thinks it can still be a strong business, but he has no idea when it's going to stabilize.

While the iPad was a lowlight, the iPhone, and Apple Watch were highlights.

In the press release for the earnings, Cook said, "We're seeing a higher rate of people switching to iPhone than we've experienced in previous cycles, and we're off to an exciting start to the June quarter with the launch of Apple Watch."

Apple didn't give any details on the Apple Watch, but Cook said demand was outstripping supply. He also said that customer response to the Apple Watch on social media has been almost 100% positive from what he's seeing.

On the call, Cook said that only 20% of Apple's current iPhone owners have upgraded to an iPhone 6 or iPhone 6 Plus. That means 80% of the installed iPhone base is still on an older phone. That leaves plenty of sales opportunities.

Here are Apple's numbers versus analyst expectations, based on data complied by Bloomberg:

EPS: $2.33, up 40%, versus $2.16 expected

Revenue: $58.01 billion, up 27%, versus $56.03 billion expected

iPhone units: 61.2 million, up 40%, versus 58.1 million expected

iPhone ASP: $658.53

iPad units: 12.62 million, down 23%, versus 13.6 million expected

iPad ASP: $430

Mac units: 4.56 million versus 4.7 million expected

Gross margin: 40.8% versus 39.5% expected

Q3 revenue forecast: $46-$48 billion versus $47 billion expected

Cash on hand: $194 billion

Here's a table from Apple that has all the key product units broken out:

CHARTS

LIVE BLOG OF THE EARNINGS CALL:

5:00: Just waiting for things to get started. Hold music for now.

5:04: Tim Cook: This is our strongest March quarter ever. Best iPhone switchers ever. Strong in emerging markets where unit sales were up 63%. Record number of people in App Store, 29% growth. $5 billion in total services revenue.

5:05: Double digit mac unit growth in a market IDC says was down 7%.

5:05: Staggering start to fiscal year, runs over the numbers... EPS up 44%.

Best Buy planning to accept Apple Pay later this year. Will take Apple Pay in its app.

5:07: 1,000 apps for healthcare. Just this past weekend, Cedar Sinai turned on largest healthkit integration... Over 1,000 researchers have expressed interest in ResearchKit, Apple's new health research software.

5:10: Also announced plans with a conservation fund to offset impact of our packaging. Apple deeply committed to these initiatives.

5:11: June quarter off to a great start.

All new MacBook just started shipping, happy with response. You have to see it to believe it. A stunning 12 inch retina display ... we believe this is the future of the notebook.

Second, is the streaming service from HBO. We helped launched HBO Now. Incredibly popular with Apple TV users, a top download.

Third, of course, is Apple Watch. Been great to see their reactions. We have seen excitement on social networks. Response has been overwhelmingly positive. There are 3,500 apps available already. Can't wait to see more of the inspiring apps developers make.

5:13: I would like to thank developers, customers, and Apple employees. With that I will turn the call over to Luca [the CFO]...

5:13 Luca takes over.

Driven by the iPhone. Impressive in Greater China. All time quarterly record for revenue.

5:14: GM ahead of our expectations because of stronger than expected iPhone results.

5:15: Says iPhone 6 and 6 Plus was popular. ASP up $62 y/y. iPhone inventory up 1 million, now in the low end of target inventory.

5:15: Talking Mac, which was up 10%, led by portables. Ended Q in 4-5 week target range.

5:16: iPad sell through was 13.7 million, reduced channel inventory by 1.1 million units, left us in inventory target. All time sales record in China, but muted elsewhere. It has been 5 years, and it has been #1 in sales, apps, and customer satisfaction. Also, #1 in enterprise. ChangeWave says 77% of people want to buy iPad.

5:19: $193.5 billion in cash and securities. Over 171 billion was offshore. Now raised $40 billion of term debt at attractive rates. Retired 13.3 million shares. We have taken action on $120 billion of our $130 billion program.

5:21: Updated the cash program, goes till March 2017. Most of it goes to share purchases because we see strength of Apple and think that's best. We understand dividend important, so we are raising it for a third time. Increasing it by 11% effect with next dividend. Will fund with US cash from operations and debt.

Bill Shope, Goldman Sachs: Did you adjust terms with suppliers? How did you deal with FX?

Luca: We expect 40 basis points of negative impact from currency in June quarter. We dealing with these headwinds, they part of business. We dealing with them in many ways. Potential to increase prices. Looking at cost structures. Feel good about guidance.

Shope: Color on iPhone mix/guidance? New to iPhone?

Tim: We continue to see a higher rate of switchers than we have seen in previous cycles. Continue to see a reasonable percentage of first time buyers in emerging markets. Revenue from emerging markets was up 58% year on year. And a big piece of what is driving that is iPhone. Results would be higher if not for FX headwinds.

Katy Huberty: Watch may take longer to ramp, is that in fact playing out? Ramping slower than past categories?

Tim: Do you mean supply?

Katy: Pre-orders, supply, say versus iPad...

Tim: Let me talk about supply and demand. Demand greater than supply, so we are working hard to remedy that, made progress over the past week or so. Able to deliver more than anticipated. Going to keep doing that. Sent some notes out about moving customers in. Generally happy with ramp. With any new product, you take some time to fully ramp. We are in a good position. By late June we anticipate being in a position to sell Apple Watch in additional countries. From demand, hard to gauge when you don't have product in stores. We are filling completely online. Customer response from people that have gotten overwhelmingly positive. Far ahead of where we thought we would be from app perspective. With iPad we had 1,000, and internally we wanted to beat that. We thought would be great to beat by a little. We have 3,500, so we couldn't be happier. Learning about customer preferences. Larger breadth of possibilities here. In some cases we called that well, in other cases making adjustments. Looking forward to expanding into more countries in late June.

Katy: R&D well ahead of revenue, what is driving that? Bigger bets?

Luca: We said several times, look at current product portfolio, we now develop two iPhones, two iPads, we have Apple Watch, we also developing some core foundational technologies. Also spending ahead of products that generate revenue. When you combine, that is why you see R&D increases year over year. Innovation is core of company. Look at last 2 quarters, revenue growth higher than OP EX growth. Expense to revenue ratio lower than a year ago, some thing we consider competitive.

Gene Munster: More switchers than previous cycles, what could that mean, how sustainable? For Luca: Margin impact from watch.

Tim: We grew iPhone 40%, IDC at 16%, so we grew 2.5 times. Look at countries, we grew at a multiple of the market. So I feel good about where we are. Strong guidance that we are very bullish on current quarter as well. Things look very very good. Doing very well with first time buyers. It's tough to find something in numbers not to like.

Luca: Q3: 38.5-29.5% is slightly down, loss of leverage from decline in revenue, which is seasonal. Launching Apple Watch, a new product, new category with new features, new innovative technologies, will be lower than company average.

Munster: Question about base.

Tim: About 20% of active install base has upgraded to a 6 or 6+. Suggests plenty of upgrade headroom. As well as invite switchers.

Toni Sacconaghi: Consensus suggests Apple Watch more in two quarters than iPad in first two quarters...

Tim: I am thrilled with Apple Watch. I don't want you to read that any other way. In any situation, watch, or in past on iPad, or iPhone. When demand is much greater than supply, it's difficult to gauge what it is. I don't want to make any comment on consensus numbers, I haven't even studied those. Customer response is close to 100% positive from what I've seen.

Tim: We're not going to guide to or give projections outside of current quarter. Watch margins for current quarter are lower than company average. Intuitive that they would be, must be looking through a different lens. In first quarter, there is learning and that is true of all products. I've never seen a tear down close to being accurate.

Shannon Cross: Asking about China...

Tim: Incredible quarter, up 71% y/y. Set a record in China for revenues. Did in a Q that includes Chinese New Year. Much like US has December. iPhone led the way, up 70% y/y, current estimates from Kantar is we gain 9 points of share. Mac had an unbelievable quarter, up 31%. Like most of the rest of the world, PC sales in China down 5%, once again bucking the tide. App Store had a record quarter grew over 100% y/y in China. With iPad, in PRC, iPad had best quarter ever, grew in a market that contracted. Really and truly everything you look at was extremely good. We have been working on expanding ecosystem, UnionPay an option for customers, increased point of sales up 9%, in many more cities than before. Worked on our online store, up 3 times y/y. Investing a lot, Chinese developers coming on in significant numbers, payments of 5 billion, almost half in last 12 months, lots of positive things. As you probably heard me say, never seen as many people coming into middle class as they are in China, where the bulk of our sales are going.

Cross: What will it take to revive the iPad?

Tim: We need to stop having sell through over sell in, no inventory correction. Have we had cannibalization? Yes. Seeing from iPhone and Mac. That is what it is, eventually will stabilize. IBM partnership in early stages. Everything I see on it, I like. iPad can be a major player in enterprise. Underlying data is better than sales. First time buyer rates: In US 40%, in China, 70%. Not numbers you get if market is saturated. That theory is not correct. See usage numbers off the charts, so far above competition not even in the same planet. Customer satisfaction at or near 100%. So my belief is as inventory plays out, as we make some continued investments in product pipeline, the enterprise, I think, still, iPad an extremely good business. When it grows, I wouldn't predict.

Kulbinder from Credit Suisse: [Hard to hear him... can't make out the question.]

Tim: Can't answer your questions. 20% from Gene, can't answer. My point for bringing it up, point is lot of people that haven't increased, screams opportunity, not to mention switchers and buyers.

Kulbinder: Of the iPhone and watch impact, is decline for both?

Luca: A number of reasons why, first one is loss of leverage, sequential decline, iPhone, and Apple Watch, not going to get into more specifics.

Bank of Montreal: Tim, you thought a lot of iPhone sales into middle class of China. Are there demos for iPhones, where they are ending up? Do you have right price points...

Tim: Look at emerging markets, revenue up 58%. BRIC up 64% y/y. Without having market research on demographics, clear to me has to be coming from middle class. Upper income earners there is only so many of those. Can't grow numbers without middle class. Don't have the data to suggest.

Follow up: HBO Now, what is thinking there for business?

Tim: It's about giving customer something they way. Giving with Apple's classic ease of use. I think HBO in particular has some great content. We are marrying their great content and our great ecosystem. There is a lot traction in there, where could it go? I don't want to speculate, but you can speculate ... on the edge of major major changes for media and I think Apple can be a part of that.

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